on Statistics for FDI and the Operations of TNCs

Transcription

1 United Nations Conference on Trade and Development Division on Investment and Enterprise UNCTAD Training Manual on Statistics for FDI and the Operations of TNCs Volume II Statistics on the Operations of Transnational Corporations United Nations New York and Geneva, 2009

2 ii UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Note As the focal point in the United Nations system for investment and technology, and building on 30 years of experience in these areas, the United Nations Conference on Trade and Development (UNCTAD), through its Division on Investment and Enterprise (DIAE), promotes understanding of key issues, particularly matters related to foreign direct investment and transfer of technology. DIAE also assists developing countries in attracting and benefiting from FDI and in building their productive capacities and international competitiveness. The emphasis is on an integrated policy approach to investment, technological capacity building and enterprise development. The terms country/economy as used in this report also refer, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. In addition, the designations of country groups are intended solely for statistical or analytical convenience and do not necessarily express a judgement about the stage of development reached by a particular country or area in the development process. The major country groupings used in this report follow the classification of the United Nations Statistical Office. These are: Developed countries: the member countries of the Organization for Economic Cooperation and Development (OECD) (other than Mexico, the Republic of Korea and Turkey), plus the new European Union member countries which are not OECD members (Bulgaria, Cyprus, Estonia, Latvia, Lithuania, Malta, Romania and Slovenia), plus Andorra, Israel, Liechtenstein, Monaco and San Marino. Transition economies: South-East Europe and the Commonwealth of Independent States. Developing economies: in general all economies not specified above. For statistical purposes, the data for China do not include those for Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administrative Region (Macao SAR) and Taiwan Province of China. Reference to companies and their activities should not be construed as an endorsement by UNCTAD of those companies or their activities. The boundaries and names shown and designations used on the maps presented in this publication do not imply official endorsement or acceptance by the United Nations. The following symbols have been used in the tables: Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have been omitted in those cases where no data are available for any of the elements in the row; A dash ( ) indicates that the item is equal to zero or its value is negligible; A blank in a table indicates that the item is not applicable, unless otherwise indicated; A slash (/) between dates representing years, e.g. 1994/95, indicates a financial year; Use of an en dash ( ) between dates representing years, e.g , signifies the full period involved, including the beginning and end years; Reference to dollars ($) means United States dollars, unless otherwise indicated; Annual rates of growth or change, unless otherwise stated, refer to annual compound rates; Details and percentages in tables do not necessarily add up to totals because of rounding. The material contained in this study may be freely quoted with appropriate acknowledgement. Details and percentages in tables do not necessarily add to totals because of rounding. The material contained in this study may be freely quoted with appropriate acknowledgement. UNITED NATIONS PUBLICATION Sales No. E.09.II.D.6 ISBN Copyright United Nations, 2009 All rights reserved Printed in Switzerland

3 VOLUME II iii Preface Many developing countries, including the least developed countries, have attracted only small amounts of foreign direct investment (FDI) despite their efforts at economic liberalization in an increasingly globalizing world. Moreover, FDI inflows are highly concentrated in a small number of countries. It is generally well known that the modest levels of, and disparity in, the distribution of FDI inflows, are due to factors such as a deficient regulatory framework, a poor business environment and opportunities, weak FDI policies and incentives, poor institutional frameworks, limited market access, unfavourable comparative costs and lack of political stability. However, what is less known is that the scarcity, unreliability and inconsistency of data collecting and reporting systems in many developing countries cause severe problems in formulating policies and strategies relating to FDI, which in turn affects their attractiveness as host countries. Against this background, UNCTAD has prepared this threevolume manual with the aim of helping developing countries to enhance the capacity of their government agencies to compile, analyse and disseminate data on FDI and the operations of transnational corporations (TNCs), based on internationally recommended standards. The manual should enable national authorities to maintain high-quality and up-to-date databases by providing them with concrete and practical guidance on how to collect and report FDI and TNC statistics (volumes I and II) and how to establish an FDI statistical system (volume III). The manual comprises the following volumes: Volume I: Volume II: Volume III: FDI Flow and Stock Data Statistics on the Operations of Transnational Corporations Collecting and Reporting FDI/TNC Statistics: Institutional Issues Volume I stresses the importance of collecting data on FDI flows and stocks in line with international definitions and standards. It provides definitions and an overview of the existing standards set or used by international organizations and national compilers. It

4 iv UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs then discusses and evaluates different approaches to compiling FDI flow and stock data, identifies data complexities and problems, and presents solutions to each of them. International guidelines on FDI data compilation need to take into account recent practices emanating from globalization, and therefore they need to be constantly updated to reflect current practices (such as mergers and acquisitions) and new requirements. This volume therefore also discusses issues and areas that need further attention. Data on the activities of foreign affiliates can be an important complement to the FDI data contained mainly in balance of payments (BOP) statistics (volume I). This is the subject of volume II. In many cases, this data set conveys a clearer picture of the economic activities of foreign affiliates and their importance to the host economy. Financial and operations data, such as those relating to assets, employment, exports and imports, are important as they enable policymakers to assess the economic impact of FDI and to design policy measures geared to maximizing the benefits of inward FDI for their country. Data on the operations of home-country TNCs are equally important to enable policymakers to monitor the performance of these TNCs affiliates and assess the integration of their country into the global economy through its outward investment. Information of such type is more difficult to obtain than BOPrelated information. It requires extra effort by statistics agencies, often through surveys of foreign affiliates and TNCs operating in the domestic economy. Volume II contains clearly defined instructions and definitions to help officials from relevant institutions in developing countries to compile and process financial and operations data of TNCs in their economies. Volume III provides an overview of the methodologies being used in the countries where FDI and TNC data are collected and reported. The aim is to examine how the surveys are actually conducted and how the work of various institutions is coordinated. Based on the findings, best practices of standard survey questionnaires are provided. Countries that have no dedicated office for reporting FDI statistics are advised to establish such an office. The volume discusses where and how an FDI statistics office could be established, the different sources of FDI statistics, and how their data are reported. It stresses the importance of

5 VOLUME II v coordination and harmonization of reporting and dissemination of FDI statistics. Volume III also aims to assist developing countries in achieving the development objective of strengthening cooperation within their regions and with other regions in the area of FDI and TNC data collection and coordination through human resources development and capacity-building. All three volumes of this manual cover the elements required for the country s FDI statistics authorities to collect and report FDI and TNC data effectively. It is hoped that the manual, together with some training, will help developing countries establish FDI and TNC statistical systems that will be able to present useful, timely, accurate and comparable FDI and TNC statistics. Each volume attempts to present relevant issues, identifying problems and providing solutions that are illustrated by concrete examples. Best practices are also suggested. These examples and practices are collected from various countries, including developing countries. September 2009 Division on Investment and Enterprise UNCTAD

6 vi UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Acknowledgements The UNCTAD Training Manual on Statistics for Foreign Direct Investment and the Operations of Transnational Corporations was prepared and finalized by Masataka Fujita with draft inputs from Frank Chow (volume I), David Buxton (volume II) and Emanuela Balestrieri (volume III) under the general guidance of Anne Miroux. Major inputs and comments were also received from Wan Ramlah, Astrit Sulstarova and Katja Weigl. Production was carried out by Katia Vieu. It was edited by Praveen Bhalla and desk-top published by Teresita Ventura. Cooperation with FDI statisticians and relevant national and international statistical authorities (e.g. IMF, OECD) dealing with FDI and TNC data was also essential. The preparation of this manual was partly financed by the United Nations development account project ( ), Support to decision-making and policy formulation on foreign direct investment in the context of the Millennium Development Goals and the Monterrey Consensus, and by the joint ESCWA/ UNCTAD project, Strengthening networking and expertise on FDI in ESCWA member countries, which was undertaken in

7 VOLUME II vii Contents PREFACE ACKNOWLEDGEMENTS ABBREVIATIONS iii vi xii INTRODUCTION 1 CHAPTER I MEASURING THE ACTIVITIES OF TNCS: CONCEPTS AND DEFINITIONS 7 A. Defining transnational corporations and foreign affiliates International standards Existing data sources Key terms Other key issues Statistical unit (enterprise versus local unit) Ultimate beneficial owner Attribution of variables: the 100 per cent rule Ownership threshold: degree of ownership versus foreign control Situations where several investors have direct investment interests Classification by geographic regions Classification by economic activity...32 CHAPTER II OPERATIONAL VARIABLES 35 A. Recommendations for compilation of operational variables35 1. Possible measures Recommendations...37 B. Definitions of key variables...41 CHAPTER III DATA AND COMPILATION ISSUES 57 A. Introduction...57 B. Data sources: ownership, investment and financial activities of enterprises Working with the BOP system Other enterprise surveys Administrative sources Other data sources...68

8 viii UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs C. Possible existing sources of operational data...70 D. Linking and merging records...70 E. Other data and compilation issues Consolidated reporting Legal issues Special treatment for certain economic activities Conversion of data expressed in foreign currencies Preparing a development plan and setting priorities...84 CHAPTER IV SURVEYING FOREIGN AFFILIATES AND RESIDENT TNCs 87 A. Setting up and maintaining registers of TNCs Register of inward investment Register of outward investment...93 B. Exploratory survey of potential respondents...95 C. Data collection strategy...95 D. Designing questionnaires and surveys...97 E. Alternative ways to collect information from respondents102 F. Winning cooperation and the reporting burden G. Conducting a survey H. Dealing with non-response I. Corroborating raw data J. Corroborating final estimates and confidentiality issues K. Publishing the results L. Processing and storing the data REFERENCES 116 SELECTED UNCTAD PUBLICATIONS ON TNCs AND FDI 117 QUESTIONNAIRE 125 BOXES Box II.1. Globalization: the impact of TNCs Box II.2. Example of affiliates Box II.3. Immediate owner versus UBO Box II.4. Holding companies Box II.5. Full attribution rule Box II.6. Majority owned versus minority-owned Box II.7. Example of treatment of a joint venture Box II.8. Treatment of multiple ownership: Swedish practice Box II.9. Major ISIC divisions (fourth revision) Box II.10. Benefits of FDI Box II.11. Compiling statistics on operations of foreign affiliates: Mexico. 36 Box II.12. UNCTAD data on the operations of TNCs

9 VOLUME II ix Box II.13. Criteria for selecting variables Box II.14. Measuring sales: examples from Canada and the United States. 41 Box II.15. Measuring part-time employment Box II.16. Example of statistics on intra-firm trade Box II.17. Example of transfer pricing Box II.18. R&D expenditures Box II.19. R&D employment Box II.20. Earnings: treatment in BOP versus operational statistics Box II.21. Relationship between FDI and other investment Box II.22. Estimating market value of FDI Box II.23. Varying definitions of employee compensation of wages and salaries Box II.24. Technology payments and receipts Box II.25. Definition of royalties and license fees Box II.26. BOP enterprise surveys: a possible source of income data Box II.27. International trade in services: coverage by BOP surveys Box II.28. Items requested from companies with FDI abroad in survey of capital invested abroad by canadian enterprises Box II.29. Matching R&D and ownership data Box II.30. Supervision of insurance companies in West Asia Box II.31. Example of regulatory agency publishing enterprise data Box II.32. Use of corporation tax records: Canada Box II.33. FDI supervisory bodies in West Asian countries Box II.34. An example of Internet site Box II.35. Largest foreign direct investors in West Asia Box II.36. National identification system for enterprises and establishments: France Box II.37. How the link was made: United States experience Box II.38. Examples of law governing confidentiality of data: Australia.. 77 Box II.39. Use of administrative records Box II.40. Conversion of foreign currency Box II.41. Example of currency conversion Box. II.42. Example of business register with basic ownership information: Finland Box II.43. Investment Promotion Agencies in selected countries Box II.44. Use of benchmark surveys and thresholds: the United States.. 96 Box II.45. Example of sampling: the United Kingdom Box II.46. Selecting threshold levels Box II.47. Example of alternative collection techniques: Singapore Box II.48. Taking care of small businesses: Statistics Canada Box II.49. Treatment of non-responses Box II.50. Example of a simple arithmetic check Box II.51. Suppressing confidential information: the Netherlands Box II.52. A dissemination strategy: example from Denmark

10 x UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs FIGURES Figure II.1. Scope of coverage of volume II Figure II.2. Consolidated reporting TABLES Table II.1. Example of different valuations: United States direct investment position, at year-end Table II.2. Outward FDI stock by industry of investor and by industry of foreign affiliates: case of Singapore, Table II.3. Percentage of value added and employment in service industries attributed to foreign-owned enterprises, Table II.4. Valuation of output: difference between basic prices and producer prices Table II.5. Value added: gross versus net, Table II.6. Measuring trade: excerpt from United States survey form Table II.7. Example of capital gains and losses Table II.8. Example: matching records Table II.9. Examples of how an enterprise group in Babylonia is recorded. 92 Table II.10. Example of possible investment register record Table II.11. Example of hypothetical collection register Table II.12. Suppressing confidential data sample worksheet BOX TABLES Box table II.6.1. Selected data on foreign non-bank affiliates of United States TNCs, Box table II FDI and other investment data Box table II.46.1 Enterprise size range by sales ANNEXES

11 VOLUME II xi Contents of Volume I FDI Flows and Stocks CHAPTER I BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION FRAMEWORK I.10-I.43 CHAPTER II FOREIGN DIRECT INVESTMENT I.44-I.135 CHAPTER III GREENFIELD FDI AND CROSS-BORDER MERGERS AND ACQUISITIONS I.136-I.155 CHAPTER IV SOURCES OF FDI FLOW AND STOCK DATA I.156-I.173 CHAPTER V MEASURING FDI FLOW AND STOCK DATA FROM FINANCIAL STATEMENTS I.174-I.197 Contents of Volume III Collecting and Reporting FDI/TNC Statistics: Institutional Issues CHAPTER I INSTITUTIONAL ARRANGEMENTS FOR COLLECTING AND REPORTING FDI STATISTICS III.5-III.44 CHAPTER II ORGANIZATIONAL ISSUES IN FDI STATISTICS III.45-III.101

12 xii xii UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Abbreviations BEA Bureau of Economic Analysis (United States) BD3 Benchmark Definition of Foreign Direct Investment, 3 rd Edition, 1996 (of OECD) BD4 Benchmark Definition of Foreign Direct Investment, 4 th Edition, 2008 (of OECD) BOP balance of payments BPM5 Balance of Payments Manual, fifth Edition, 1993 (of IMF) ECB European Central Bank EU European Union Eurostat Statistical Office of the European Communities FATS Foreign AffiliaTes Statistics FDI foreign direct investment f.o.b. free on board GATS General Agreement on Trade in Services IIP international investment position IMF International Monetary Fund INSEE Institut National de la Statistique et des Etudes ISIC International Standard Industrial Classification of All Economic Activities ITRS international transactions reporting system MSITS Manual on Statistics of International Trade in Services OECD Organisation for Economic Co-operation and Development R&D research and development SIRENE French computerized directory of companies and establishments SNA System of National Accounts 1993 SPE special purpose entities TBP technology balance of payments TNC transnational corporation UBO ultimate beneficial owner UNCTAD United Nations Conference on Trade and Development VAT value added tax WTO World Trade Organization

13 VOLUME II 1 II.1. The purpose of this volume is to clarify concepts, definitions and methodologies needed to collect and compile information on the operations of transnational corporations (TNCs) in their respective economies. Its aim is to provide practical guidance on collecting statistics on the operations of home-based as well as foreign-based TNCs. Concrete and useful examples are collected from various countries to illustrate key points. Chapter I highlights the importance of compiling data on TNCs operations, and reviews the main issues and concepts relating to foreign ownership and investment. Chapter II discusses the selection and definition of operational variables. Chapter III provides an overview of various data and compilation issues, and Chapter IV offers guidance in designing and conducting surveys of foreign affiliates. INTRODUCTION II.2. The rapid global expansion of TNCs through foreign direct investment (FDI) has resulted in their becoming the dominant force in international commerce. In 2001, the world s 65,000 TNCs and their 850,000 foreign affiliates accounted for about two thirds of world trade (UNCTAD, 2002). Their role in international production in the world economy also makes them the main force in international economic integration. More and more countries are recognizing the considerable impact that FDI can have on host countries as well as the range of costs and benefits that it can bring (box II.1). As a result, it has become necessary to provide policymakers with a broader array of statistical measures than has hitherto been available in most countries. The need for such data is being increasingly acknowledged in developed and developing countries, as well as in countries with economies in transition. Major TNCs have also recognized this need, and they have played a leading role in developing new data sources and methodologies. II.3. Assessing the impact of inward FDI (i.e. direct investment in the domestic economy) and outward FDI (i.e. direct investment abroad by domestic enterprises) requires a considerable amount of statistical information. Data on

14 2 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Box II.1. Globalization: the impact of TNCs As of end 2007 there were some 79,000 TNCs engaged in international production, with about 790,000 affiliates abroad. The total FDI stock reached over $15 trillion in Value added by TNCs was estimated at $6 trillion and total sales at $31.2 trillion, compared to world exports of $17 trillion. Foreign affiliates accounted for an estimated 11 per cent of world GDP in 2007 compared to 7 per cent in 1990 (UNCTAD, 2008). The value of FDI flows is an obvious measure of the scope of TNCs. However, it is difficult to assess the full impact of FDI flows alone, as FDI figures do not necessarily show the total value of investments by TNCs in instances when affiliates raise funds in domestic or international markets. For example, affiliates of Japanese TNCs raised $3 billion from local banks alone in 1998, equivalent to 13 per cent of Japanese FDI outflows (UNCTAD, 2002: 14 15). Data on the operations of TNCs and their Source: UNCTAD, affiliates abroad are an additional measure of the impact that TNCs may have on home and host countries. Some figures illustrate the growing importance of TNCs activities over the past two decades: The number of employees in foreign affiliates worldwide is estimated to have been 81.6 million in 2007,compared with 21.5 million in 1982; Foreign affiliates generated a gross product of about $6.1 trillion in 2007, compared with$0.6 trillion in 1982; Total sales of foreign affiliates were about $31.2 trillion in 2007, compared with $2.7 trillion in 1982; Exports undertaken by foreign affiliates in 2007 were estimated at $5.7 trillion, compared with $0.7 trillion in 1982); Foreign affiliates held total assets of about $68.7 trillion in 2007, compared with $2.2 trillion in FDI generated for the balance of payments (BOP) and international investment position (IIP) cover only part of such investment. II.4. Statistics on the operations of TNCs can complement and enrich the use of BOP statistics. Operational data can convey a more specific and comprehensive picture of the operations of TNCs and their economic significance. Such data contain a broad array of statistical measures on the production and financial activities of TNCs, thus offering a deeper insight than would otherwise be available. Operational data may

15 VOLUME II 3 include statistics that measure the impact of direct investment on the labour market, on technology transfer, innovation, and research and development (R&D), on the sources and uses of investment funds, on international trade, and on economic efficiency and competition. They also offer a more diverse set of data for gauging the level of foreign ownership for the economy as a whole, as well as information for specific sectors and, more suitably, at more detailed levels of industrial classification than BOP data. II.5. Policymakers and analysts need data classified by economic activity and geographic location to fully understand the impact of FDI at both the macro and micro levels. They need to understand the impact of foreign investment on individual industries in order to be able to assess which industries and sectors are most affected, what the levels of FDI concentration are in individual industries (particularly in ones of national importance) and how these levels are changing over time and as a result of government policies and economic and political events. While it is generally difficult to collect very detailed information on activities at the enterprise level, data can usually be compiled at a more disaggregated level of industrial classification. The need for geographic detail is also quite clear. Not only is it necessary to know the levels of and changes in FDI in general, but it is also important to know which countries the investment is coming from and going to. Apart from the economic implications, there are important administrative needs as well. Such knowledge is important to governments for considering tax, investment and employment treaties or for helping them decide on where to promote trade and investment and to locate foreign trade missions, for example. II.6. Thus the availability of operational data and additional financial data can greatly enhance the ability of policymakers to assess the economic impact of FDI and to design policies aimed at maximizing the benefits of inward FDI for their country. At the same time, data on the foreign operations of home-country TNCs are also required for monitoring the performance of affiliates and assessing the integration of the country in the global economy through outward investment. Information of this type is often more difficult to obtain than BOP-related information. It requires extra effort by the institutions concerned to compile

16 4 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs such information, often through surveys of foreign affiliates and TNCs in the domestic economy. II.7. The purpose of this volume is to provide government officials with a set of clearly defined concepts, definitions, approaches and guidelines to enable them to collect and compile information on the operations of home-based as well as foreign-based TNCs. In other words, it addresses both inward and outward FDI and the economic activities of these firms (as shown in figure II.1 on scope of coverage). An important element of this volume is that it provides numerous practical cases and examples of how countries address the various methodological issues in the compilation of operational data or tables. II.8. Volume II is organized into four chapters: (a) Chapter I examines the issues and concepts involved in measuring the activities of TNCs and their foreign affiliates. It reviews international standards and the concepts of residence, valuation and timing, and provides a definition of key terms such as TNCs, foreign affiliates and FDI. It examines such practical issues as geographic and economic classification systems, and which statistical unit should be used for collecting statistics on the operations of TNCs: the establishment, enterprise or enterprise group. The chapter also provides guidance on how to handle indirect ownership situations (i.e. the treatment of ultimate beneficial owners versus immediate owners), the attribution of variables, degree of ownership versus foreign control and situations where several investors have direct investment interests. (b) Chapter II examines the statistical variables that can be used for measuring the activities of TNCs and their foreign affiliates. Chapter II evaluates and makes recommendations on the many variables that can be used to measure the impact of TNCs operations in such key economic areas as international trade in goods and services, labour and capital markets, and research and development. It also provides definitions of the main operational variables. (c) Chapter III provides an overview of alternative data sources and other compilation issues. It emphasizes the

17 VOLUME II 5 importance of investigating existing sources of ownership, investment and operational data, including administrative sources and any enterprise and establishment surveys that are already being used for collecting BOP and other statistics. Also covered are techniques for merging data records, consolidated reporting, special considerations affecting certain economic activities such as construction, shipping and insurance, various legal issues, techniques for converting data expressed in foreign currencies, and the need for preparing a development plan and setting priorities. (d) Chapter IV provides guidance on designing and conducting surveys of TNCs and their foreign affiliates. It reviews the steps involved, from identification of foreign affiliates and the use of exploratory surveys to the design of questionnaires and the compilation and publication of the information collected. These steps include setting up and maintaining a register of respondents, designing the questionnaires and surveys, conducting a survey, developing techniques for dealing with non-response and undercoverage, corroborating raw and final data, and storing and processing the data. The chapter also examines possible data collection strategies, including the use of censuses, sampling, benchmark surveys and reporting thresholds. It discusses techniques for obtaining the cooperation of survey respondents, problems or respondent burden, protecting the confidentiality of data and alternative techniques for collecting survey data.

18 6 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Figure II.1. Scope of coverage of volume II Reporting economy Other economies < Activities covered in volume II < Parent firms Parent firms Foreign affiliates Foreign affiliates Domestic affiliates Domestic affiliates Activities of foreign Activities of foreign Activities of affiliates in the host affiliates abroad parent firms economy (inward (outward investment) investment) Source: UNCTAD.

19 VOLUME II 7 CHAPTER I. MEASURING THE ACTIVITIES OF TNCs: CONCEPTS AND DEFINITIONS II.9. This chapter examines the basic issues involved in measuring the activities of TNCs. It reviews international standards and such important concepts as those of residence, valuation and timing, and provides definitions of TNCs, foreign affiliates and other key terms. In addition, it examines such practical issues as geographic and economic classification systems, which statistical unit should be used to collect statistics on TNCs (the establishment, enterprise or enterprise group), how to treat indirect ownership situations (the treatment of ultimate beneficial owners versus immediate owners), the attribution of variables, degree of ownership versus foreign control and situations where several investors have direct investment interests. II.10. In essence, statisticians wishing to produce meaningful statistics on the domestic operations of foreign affiliates (inward investment) are faced with two broad tasks. They must identify which domestic enterprises are foreign affiliates and determine what useful data need to be collected concerning the operations of those affiliates. Similarly, in order to collect operational data on domestic enterprises with affiliates abroad and on those affiliates (outward investment), statisticians must first identify investing firms and then collect the relevant operational data. In other words, it is recommended that countries collect data both on parent firms and their foreign affiliates. II.11. The concepts used for collecting operational statistics should be consistent with established national and international statistical principles. While statistics on foreign affiliates operations are of interest in their own right, much of their value stems from the insights they can provide vis-à-vis the national data for the economy as a whole. Operational statistics should provide yardsticks for assessing the impact of FDI on the domestic economy and for evaluating the performance of domestically based TNCs. Operational data should use the same methodology as that used for the national data to enable a comparison of the two

20 8 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs sets of data. It is widely recognized that FDI statistics often suffer from a lack of comparability. This hampers critical economic research, analysis and policy development. It also distorts the views and understanding of the contributions of FDI and TNCs in global economic development. While international efforts are being made to improve comparability of FDI statistics, it is also important that the methodology for collection of operational data is consistent with internationally accepted definitions so as to enrich FDI statistics and to facilitate international comparisons. A. Defining transnational corporations and foreign affiliates 1. International standards 1 II.12. The methodology for compiling statistics on the operations of TNCs is not as well developed as that used for measuring FDI flows and stocks (see volume I). For most countries, the collection of statistics on the activities of TNCs is a relatively new endeavour. Nevertheless, a growing number of countries are now compiling such statistics as 1 Many of the major reference documents are available on the Internet. the need for such data is being increasingly acknowledged both by national and international bodies. International organizations such as UNCTAD, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the World Trade Organization (WTO), the United Nations Statistics Division and the Statistical Office of the European Communities (Eurostat) have played a key role in arguing for this need, and in developing the concepts and methodology necessary for the purpose. II.13. The concepts relating to foreign investment and foreign affiliation (including the concepts of ownership, residence and valuation), which are recommended for use in operational statistics, are based on concepts developed by the United Nations and the IMF. These organizations initially developed the concepts for use in the System of National Accounts (SNA) and the BOP, but have since elaborated on them. There is now general agreement on all but a few issues. 2 2 The main issues are whether data should be collected only for majorityowned foreign subsidiaries and branches or also for foreign associates, and whether to ascribe ownership of a direct investment enterprise to its immediate foreign owner or to the ultimate beneficial owner.

21 VOLUME II 9 The concepts recommended for use in operational variables are to a large extent based on concepts used in the SNA. II.14. The concepts and definitions used in this volume are based on and consistent with international standards. They are discussed in more detail in the following reference works described below. (a) IMF, Balance of Payments Manual, 5 th edition, 1993 (BPM5). BPM5 establishes the conceptual framework on BOP statistics and the international investment position (IIP). It is the source of many of the concepts and definitions used in the measurement of TNC operations, such as direct investment, residency, valuation and accrual accounting. The new BOP manual (BPM6), which was adopted in 2008 and will be released in 2009/2010, improves on existing concepts and definitions (e.g. economic territory, units, institutional sectors and residence) in light of national experiences. (b) IMF, Balance of Payments Compilation Guide, A companion document to BPM5, the primary purpose of this guide is to provide (c) direction on the compilation of statistics on BOP and the IIP. Much of its advice is also of direct relevance to operational statistics. It provides invaluable guidance on data collection and compilation techniques and issues, including a comprehensive review of surveys, administrative records and other data sources. It covers a broad array of issues, including the design of data collection systems and dealing with nonresponse, security and storage of data, and the publication of final estimates. Another companion publication by the IMF entitled Balance of Payments Textbook (1996) presents illustrative examples and applications of concepts, classifications and conventions. OECD, Benchmark Definition of Foreign Direct Investment, 3 rd edition, 1996 (BD3). BD3 offers practical guidance to statisticians on how FDI should be compiled to meet internationally agreed standards (OECD, 1996:7). It discusses in detail, the problems of consolidation, special transactions, treatment of holding companies, tax

22 10 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs haven corporations and other special purpose entities, and the recording of specific transactions. It also offers concrete examples of how various OECD countries have resolved measurement issues. In the fourth edition of the OECD Benchmark Definition (BD4) chapter 8 (on FDI and Globalisation) provides a brief overview of the methodology of statistics on the activities of TNCs. It further discusses concepts such as ownership criteria, statistical units and the attribution of TNC variables, as well as economic variables for TNC statistics. (d) United Nations, the European Commission (EC), IMF, OECD, UNCTAD and WTO. Manual on Statistics of International Trade in Services (MSITS), The primary focus of this manual, as the title suggests, is on trade in services, and in particular on the need for more comparable, detailed and comprehensive statistics on trade in services. Nevertheless, because of the important role played by TNCs in the development and delivery of international trade in services, one chapter of this volume (chapter IV) is devoted to measuring the operations (e) of foreign affiliates mode 3 of the four GATS modes of supply(wto, 1995). It is a useful reference document, which reviews the key issues and definitions involved and makes comprehensive recommendations for the collection of these statistics. A revised MSITS, expected to be published in 2009, updates conceptual frameworks and classifications in conformity with those presented in other updated publications such as BPM6, SNA and BD4. While there are no significant changes from the first edition, the revised version separates more clearly inward and outward Foreign AffiliaTes Statistics (FATS). The concept of foreign affiliates is used synonymously with direct investment enterprise, as defined in BPM6 and in the first volume of this Training Manual. OECD, Manual on Economic Globalisation Indicators, This manual provides a core set of indicators which offer an opportunity, using appropriate methodology, to assess the contribution of TNCs, also referred to as multinational firms to the economic activities of

23 VOLUME II 11 (f) the countries in which they are located. The indicators presented in this manual make reference to the activities of multinational firms in three areas that have driven the process of globalization: international trade, FDI and various forms of technological dissemination. The proposed economic globalization indicators can be divided into three broad categories based on their measurement of the following: (i) the extent and intensity of globalization; (ii) the impact of globalization on economic performance; and (iii) globalization s tie-ins with policies and structural reforms. OECD Handbook on Economic Globalisation Indicators (2005). This handbook deals with the economic activity of multinational firms. It develops the main concepts and definitions relating to data for their activity, notably the concept of control of an enterprise and identification of the country of the investor that has ultimate control over its activities. Building on national statistical agencies best practices, pragmatic and operational recommendations are made in order to enhance international comparability of indicators and basic data. The definitions proposed are consistent with those contained in the fourth chapter of the MSITS. (g) Eurostat, Recommendations Manual on the Production of Foreign AffiliaTes Statistics, This manual which serve as a milestone on the way to achieving EUwide harmonised foreign affiliate statistics (FATS). It preceded the FATS regulation (Regulation (EC) No. 716/2007 of the European Parliament and of the Council of 20 June 2007) adopted the same year, which ensured the availability of harmonized FATS data. It provides definitions and guidelines for national compilers, which are the indispensable prerequisites for obtaining FATS to produce meaningful EU-wide aggregates. The manual is not only in line with the rules in the EC FATS Regulation, but also treats the needs and realities that national compilers face in practice (Eurostat, 2007: 3) (h) Eurostat, Balance of Payments Vademecum, March 2002 and The 2002 edition is a reference work that describes Eurostat s needs for BOP

24 12 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs (i) statistics. It is intended to help statisticians in EU member countries to meet those needs. Of particular interest for non-eu countries collecting operational statistics are the questionnaires (Eurostat, 2002: ) on foreign affiliates trade statistics, turnover, employment and value added variables, which EU member countries are required to complete. The updated version of the Balance of Payments Vademecum, December 2008, reflects, among others, the requirements of the European Parliament and the Council concerning regulations on the structure of foreign affiliates in EC statistics. United Nations, System of National Accounts, 1993 (SNA). This is under revision. The SNA presents the conceptual framework for many of the operational statistics covered in this volume of the UNCTAD Training Manual. Conceptually, the BOP system is closely linked with the SNA. The two systems share many elements, including identical treatment of such concepts as residence, timing, valuation and the reinvested earnings of direct investment. II.15. In addition, this present volume draws on concepts and definitions described in the following publications: (a) European Central Bank, European Union: Balance of Payments/International Investment Position Statistical Methods, May This is a revised version of an annual publication that provides documentation on the methodologies used by EU member States for compiling BOP and IIP statistics. (b) European Central Bank, Accession Countries: Balance of Payments/International Investment Position Statistical Methods, February This describes the methodologies which the 12 accession countries to the EU use to compile BOP and IIP statistics. 2. Existing data sources II.16. Many national, regional and international organizations publish statistics on FDI and TNC operations. They provide an invaluable overview of the many variables collected, insights into the technical problems that exist, as well as the different approaches used in collecting and publishing such data. Some of these publications also provide

25 VOLUME II 13 definitions of key terms. These sources include the following: (a) OECD, Measuring Globalisation: The Role of Multinationals in OECD Economies (currently being updated). The 2007/08 edition comprises two volumes, covering the manufacturing and services sectors respectively. To meet new needs for analysing the globalization process, in 1990 the OECD requested its member countries to collect data on the performance of foreign affiliates in the manufacturing sector. Subsequently, it extended its surveys to cover the manufacturing activities of TNCs abroad and their activities in the services sector in member countries. This publication covers the results of these surveys for up to 17 member countries. It also provides a brief description of the sources and methods used by each country to compile operational statistics, using up to 18 variables. (b) UNCTAD, World Investment Reports (WIR) are annual publications that provide upto-date data and analysis on trends in global FDI, along (c) with in-depth examination of selected themes related to TNCs. In addition to the latest data on worldwide inward and outward FDI flows and stocks, a statistical annex presents variables relating to the activities of TNCs. UNCTAD, World Investment Directory series. This series provides definitions of key terms as well as data on FDI and TNCs operations in individual countries. In addition to inward and outward FDI flows and stocks, with sectoral and regional breakdowns (and, whenever available, by country and by industry), each volume provides the latest data on the operations of foreign affiliates in the host economy, the operations of TNCs abroad and the operations of parent TNCs. The different volumes in the series also provide tables on the legal frameworks for TNCs and FDI and a list of the largest foreign affiliates and of the largest TNCs in each country (see also box II.12 of this volume). The series comprises the following volumes: Volume I: Asia and the Pacific, 1992 Volume II: Central and

26 14 UNCTAD TRAINING MANUAL ON STATISTICS FOR FDI AND THE OPERATIONS OF TNCs Eastern Europe, 1992 Volume III: Developed Countries, 1992 Volume IV: Latin America and the Caribbean, 1994 Volume V: Africa, 1997 Volume VI: West Asia, 1997 Volume VII: Asia and Pacific, 2000 Volume VIII: Central and Eastern Europe, 2003 Volume IX: Latin America and the Caribbean, 2004 Volume X: Africa, 2008 (d) Eurostat, Foreign-owned Enterprises, Results for Eight Members States, This two-part publication provides useful insights into the role of foreign-owned enterprises in eight member States of the EU. Part 1 covers foreign-owned enterprises in these States, and includes information on the location (by country and industry) and source of FDI. Part 2 covers the operations of foreign affiliates, using measures such as productivity and variables on profitability. (e) European Union, Direct Investment Yearbook. This yearbook presents FDI flow and stock data for the EU member countries as well as for other selected countries. It covers major developments in direct investment in the EU. The annex describes data compilation methodology and definitions used by the reporting countries. Among other things it covers FDI abroad by EU members, FDI into EU countries and intra-eu direct investment. (f) OECD, International Direct Investment Statistics Yearbook, This annual publication provides a complete series of international direct investment statistics in standard format, combining sectoral and geographical breakdowns for FDI flows and stock data for all OECD countries. 3. Key terms II.17. The following is a list of definitions commonly used to describe the entities involved in FDI. Transnational corporation II.18. Transnational corporations (TNCs) are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. 3 A parent enterprise is defined as an 3 As defined by UNCTAD. Other organizations, such as the OECD, also refer to TNCs as multinational enterprises or MNEs.

27 VOLUME II 15 enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain equity capital stake. An equity capital stake of 10 per cent or more of the ordinary shares or voting power for an incorporated enterprise, or its equivalent for an unincorporated enterprise, is normally considered the threshold for the control of assets. A foreign affiliate is an incorporated or unincorporated enterprise in which an investor that is a resident in another economy owns a stake that permits a lasting interest in the management of that enterprise (UNCTAD, WIR, 2008: 249). In essence, the term TNC is used to include: (i) An enterprise that owns 10 per cent or more of the ordinary shares or voting power in one or more enterprises (its foreign affiliate(s)) located in a country of which it is not a resident, and (i) Those foreign affiliates. This is consistent with the definition of direct investment used in BPM5, which states that a direct investment relationship exists when investors own 10 per cent or more of the voting shares or stock of an enterprise that is a resident of another country. It should be noted that the relationship can only be established through the ownership of voting shares or voting power. The definition of a TNC (and direct investment) does not include firms that control assets abroad through various non-equity ties (for example, management contracts, transfer-of-technology contracts, sub-contracting agreements, franchising) and that are linked to other firms through strategic alliances. 4 Enterprise II.19. The term enterprise refers to a legal entity operating within a country, such as a corporation or an unincorporated branch. Enterprises may be privately owned and/or controlled, publicly owned and/or controlled, or controlled by residents and/ or non-residents. Enterprises may be financial or nonfinancial institutions (IMF, BPM5, paragraph 75). Foreign direct investment II.20. Foreign direct investment (FDI) is a category of investment that reflects the objective by 4 See Definitions and sources in UNCTAD, World Investment Reports.